Steve Randy Waldman is onto something in this post.
[I]nformation asymmetry is that the sellers know what they are selling much better than the buyers know what they are buying. However, I do not think this is what distinguishes those four industries. There are plenty of other situations of information asymmetry, including buying a house, buying a car, or buying a piece of electronic equipment.
I think what distinguishes these four industries is that the sellers themselves know less than what people expect. Educators do not know what, if anything, actually adds value. For all we know, test scores are determined by the backgrounds (mostly genetic) of the students, with remaining differences that are random and irreproducible.
Kling is right, of course.
This is quite topical for me for all sorts of reasons, not least that Lateral Economics has just finished a major study of Commonwealth purchasing of legal services (shortly to be posted to our outputs page – now available here – pdf) in which we put at the centre of our analysis the fact that professional services like legal services are search goods (it’s costly to find the right one), experience goods (you’re best informed of the products quality after you’ve bought it) and credence goods (you often don’t know that much about the quality of the product even after you’ve bought it and experienced it.)
Anyway, I’d like to say quite a lot about this but don’t have the time. But just as a marker, one of the points that Steve goes on to make is that the theatre of all these credence goods industries is a fine parody of the actual state of affairs.
More interesting is Kling’s point: “sellers themselves know less than what people expect”. That is, service providers in these industries are themselves uncertain of the value they are able to provide. Yet providers work hard to hide and downplay their uncertainty. Politicians pushing new programs offer authoritative projections of brilliant outcomes, although many initiatives fail once the lights of the bill-signing fade. Healthcare, finance, and education are built around credentials and prestige, despite questionable correlations between these tokens and value provided. Healthcare, finance, and educational institutions market themselves hard, portraying themselves as professional, competent, and above all, effective. These claims are not certain to be lies: High competence might sit within the wide confidence intervals that would surround a fair evaluation. But successful institutions do, and must, misrepresent those confidence intervals (to others, and sometimes to themselves). After all, would you go under the knife of a surgeon who told you that he thinks he might be competent? In all of these industries, there is an information asymmetry surrounding the degree of certainty that the services provided will in fact provide value. Providers have reason to be far less confident of their ability to deliver than they lead their customers to believe.
I think Steve could have thrown in ‘management’ as one of the asymmetric info industries and then you could see what a pretty pass we’re in. (The other way of accommodating the point would be to make ‘government’ a subset of ‘management’. Then you have managers who are agents representing principles and they exist in large private firms and in government.)
One of the implications that comes from the picture that’s being painted of these double blind credence good industries is that the right ethos for these professions modesty. Alas, as Steve makes clear, the culture of these industries – I think with the exception of education – is the exact opposite. Arrogance, ‘trust me’ and hubris. John Kerin got sacked as Treasurer for telling the truth: When would the recession of the early 1990s end? “Your guess is as good as mine”.
One of the things it puts me in mind of is all the hubris of ‘strategic planning’ with all the nonsense that’s involved in it. So much of this is a kind of anti-thinking in which one pretends that strategic planning is all about everyone having a say, feeling good, ‘aligning’ with their boss and their team. It’s all part of the shtick of confidence in the elite – or pretending you know what you’re doing.
So much of what comes out of these things is self-evident nonsense – visions of the future in ten years time, plans to get there, when the best one could do in one’s ignorance would be to look around for a few things that you could be half-way confident might enable you to make a few things work a little better with some serious effort. Instead great visions are summoned up over a weekend (to be largely forgotten in the cold light of weekdays) all as a kind of cover for the profound ignorance of everyone concerned.
The other thing that it’s worth saying is that the predicament also raises the question of surfacing information about the performance of these sectors. That’s very hard to do in some areas – like government – but one can get some good information if not comprehensively, then at least about some important snippets of performance. For instance I know someone who’s seriously considering back surgery. Back surgery is notorious for bad results. Yet it’s sometimes necessary. It’s a bloody scandal that no method exists other than word of mouth for determining questions like “Which back surgeons are well regarded by those they’ve done back surgery on a year after the surgery”. One can track that information. But we don’t. It would also not be hard to track how gung ho surgeons are about operating – one could use Gruen tenders for instance.
But of course none of this is done. It’s true that policy makers are starting to get interested in this stuff, but they keep stuffing it up, for instance in the UK with crude targeting measures that resemble Gosplan rather than careful strategies to surface information whilst minimising the perverse incentives crude metrics can unleash. Oh and we seem to be coming up with our very own family of such disasters.
And you can use things like Gruen Tenders in ways that can actually influence the rewards to integrity. As we wrote in our report on the purchasing of legal services – discussing the merit of Gruen tenders in the purchasing of legal services:
Value for money is determined not just by price, but by quality which is itself a multi-dimensional concept embracing such things as thoroughness, relevance, accuracy, business relevance, timeliness, responsiveness, the client’s confidence that he has not been under or over-serviced and so on.
While various means have been developed to hold ‘multi-attribute auctions’ the problem is not merely the difficult technical problem of the architecture of the auction, but the more fundamental one which is that major aspects of job quality can never be perfectly reflected in the metrics into which bids in the auction would need to be converted. As a result, we expect that judgement will remain, necessarily, a major part of the process of choosing the best value for money provider. . . .
The Gruen Tender process can be valuable here also, as it can be used to develop prognostic foresight in any dimension. . . . Given the importance of determining the quality of particular people working on projects it would be possible to encode this information into the system and so generate prognostic information on the impact of such personnel on the various service quality metrics collected. One might also seek to use it to generate data on matters that are of great importance to the Commonwealth obtaining value for money such as the client’s perception that they have received the appropriate level of service, not having received too little or too junior attention to some matter and not having been charged for more hours of work than was appropriate to deal with a matter. . . .
Where the client depends so crucially on being able to trust the service provider’s judgement and integrity, a Commonwealth wide reputation for having the confidence of ones clients not to be over or under-servicing would be a highly valuable prize to win and keep.